Bilibili Inc.

Good day and welcome to the Bilibili 2021 Third Quarter Financial Results and Business Update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliette Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, Operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions, and expectation as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. Definition of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference call is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com. Joining us today from Bilibili Senior Management are Mr. Wei Chen, Chairman of the Board and Chief Executive Officer, Ms. Kali Li, Vice Chairwoman of the Board and Chief Operating Officer, and Mr. Sam Fan, Chief Financial Officer. And I will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Thank you, Julia. Thank you, everyone, for participating in our 2021 Third Quarter Results Conference Call. I'm pleased to deliver today's opening remarks on behalf of Midtern. Our strong third quarter's results once again demonstrate our ability to execute and deliver our growth strategy. In our peak summer season, we added over 13 million MAUs to our Bilibili community, bringing our total MAUs to 267 million, up 35% year-over-year. Mobile MAUs also rose to $250 million, and DAUs came in at $72 million, representing growth of 36% and 35%, respectively, both on a year-over-year basis. This solid growth makes us more confident than ever that we can reach our MAU growth target by 2023. Importantly, Our community is becoming more engaged and even thicker. Expanded video content across formats and scenarios drove an increase in users' daily time span on Bilibili, which reached 88 minutes in Q3, the highest we have ever seen in our operating history. This is particularly impressive and really shows the quality of our old and new users, given how fast we have grown. Other key operating matrix also grew substantially. Daily video views were up 77% to 2.3 billion. Monthly interactions were up 86% to 10 billion. And the monthly video submissions were up 80% to 10 million. Each of these matrix represents all time highs and reflects the health of our community, as well as the strength of the engine that powers our growth. Our effort to grow our user base while maintaining a strong and tight-knit community also had a very positive impact on our commercialization progress. Total revenues in Q3 reached $5.2 billion, up 61% year-over-year, beating the high end of our previous guidance. By matching the right content to our growing number of B2B users, more traffic was converted to paying users. MPUs reached 24 million in the third quarter, a 59% young year, and our paying ratio grew to 8.9%. Another factor driving our top line is our increasing appeal to business partners. This is particularly true for advertisers who are eager to gain visibility with the growing number of Gen Z Plus users on our platform. To reach an even broader number of users, last year, we redefined our brand proposition with a face or the videos you like. Today, more users recognize and view Bilibili as the go-to destination for high quality video content. In recent BrandZ report, Bilibili was ranked as the number two most valuable brand name in China in terms of growth rate. With increasingly recognition from advertisers across different industry verticals, our ad revenue grow by 110% young year in the third quarter. Even with microeconomic challenges, Looking ahead, visualization trends continue to surge, rapidly emerging as the preferred and new norm. As a premium video platform with broad content and community appeal, we expect to see continued benefit from the increasing visualization movement. Carrying out our solid strategy to expand our content, community, and commercialization We believe we are on the right path to becoming a valuable new gateway to the Internet. We have also strengthened our commitment to social responsibility. Using our public influence, we are further developing an inclusive community, promoting positive content and enacting better ESG practice. With that overview, I would now like to walk you through some details of our third quarter operations. I will begin with the first part of our 3C model, our content. The key to our user growth lies with our broad unmatched PUGBs. At the center of our video ecosystem, PUGBs continue to flourish, accounting for 93% of our video views in the third quarter. We have carefully created an extensive platform for high-quality content creators to be recognized, appreciated, and valued. We continue to improve our toolkit and services to lower barriers of creation, including our involving video editing app, BGM, as well as various creator support programs. In the third quarter, Monthly video submission hit a milestone of 10 million, up 80% year-over-year. The number of monthly active content creators also accelerated to 2.7 million, up 61% year-on-year. With our continuous efforts to improve our traffic distribution mechanism, content creators can flourish and attract fans more easily. In the third quarter, Content creators with more than 10,000 followers grow by 42% year-over-year. We continue to optimize and create new venues for them to realize their commercial value. These include our advertising matching platform, Sparkle, and the live broadcasting platform, bringing more commercialization opportunities to content creators at all levels. Our ongoing cash incentive program is also motivating an increasing number of mid-layer creators, encouraging their continuous content creation. By the end of the third quarter, 481,000 creators have benefited from this plan. Bilibili is home to thousands of interest-based content categories, and we are excited by our roadmap to keep building great new content for users in the third quarter. The top five populated POGB categories of lifestyle, game, entertainment, ATG, and knowledge continue to flourish and will welcome more users across various demographics. Other emerging verticals, such as fitness, food, and travel, are also gaining increasing interest. In addition to expanding content categories, we are also expanding our content formats to meet user different needs. For example, StoryMall, our short-form video content in our mobile app, offers quick on-the-go entertainment, which is designed to suit user fragment time. Conversely, our Bilibili app on Smart TV is the perfect solution for users seeking a high-quality, high-resolution, immersive video experience on a larger screen. We are encouraged by the strong momentum in user growth and the engagement and believe there is still a lot of room to grow ahead. For our OGV department, our OGV content reinforces our leading POGV verticals and introduces new ones to broaden our reach and our community's high-rises. Leveraging both our platform and production capabilities, our OGVs are helping drive created-in-China content. For example, Chinese Enemy can breathe new life into classic tales, helping Chinese culture resonate with young generations. In the second half of this year, we released multiple Bilibili-produced anime titles, including the second season of Mega Hits, Carbon Reborn , and Hundred Monsters , as well as The Daily Life of the Immortal King , all of which were immediately reviewed by anime lovers. Similarly, our documentaries and the variety shows are occurring within areas of young Chinese interest. These have achieved great success in promoting the Bilibili brand and building influence within these counter-verticals. Our self-produced matchmaking hit 19 Hunjie Suo is a good example that deeply resonated with our Gen Z Plus users and has given life to discussions beyond the Bilibili community. trending on social media platforms for weeks. We also released a music variety show, The Next Banner, or the 音乐年轻漫 in Q3. The show supplements our newer music content creations and appeals to music lovers in our community. In addition, we launched a series of self-produced, widely welcomed food scene documentaries with more to come. including the upcoming third season of The Story of Chuan , which reflects the growing interest in Chinese cuisine as well as the lifestyle categories. Turning to our community, our Shuyin community shows the quality of user growth. In the third quarter, daily video views increased by 77% year-over-year to 2.3 billion. and the monthly interactions were up 86%, reaching over 10 billion. Both metrics grow much faster than expected, and our users showed increasing engagement across our community. These interactions are the essential elements that make Bilibili experience so unique. At the same time, we are excited to see more casual users converting to official members by taking our unique community entrance exam. By the end of the third quarter, we grew the number of official members by 38% year-on-year to 133.6 million. For this co-user cohort, the 12-month retention rate remained above 80% in the third quarter, once again showing the strength of our community. Now, let's look at our commercialization progress. Our diverse revenue streams have become more and more balanced. While revenue from each of our segments grow in the third quarter, our advertising revenues have become our larger growth engine, followed by our vast and e-commerce offerings. Let's look at this in more detail within our commercialization segments, starting with our games. We see games as an advanced format of entertainment and a representation of cultural sub-power. Believing in the positive power of good games, our goal is to bring users more high-quality games both domestically and internationally, with a heightened focus on internal development. Leveraging our deep understanding of user preference and our rich game operating experience We are devoted to building our development capabilities for the new generation of players. At the same time, we are adamant from promoting exciting Chinese culture to large gaming world. Looking specifically at our third quarter game performance, revenue from our mobile games increased by 9% year over year to only 1.4 billion. We added three new titles domestically to a roster of exclusive licensed games or have been well-received by their followers. We also celebrated the fifth year anniversary of our legacy title, FGO, in September. Additionally, we successfully jointly published more premium games, including Tencent's League of Legends and the 90s Harry Potter, continuing to expand game offering in diverse genres. As for our domestic game pipeline, nine games have acquired approval and are ready for domestic release in the coming quarters. In the meantime, we are rolling out more Chinese game masterpieces to the global game market. Following our success of RE final year, 重装战机, we continue to build our distribution capabilities with the successfully launched our figure story, 章的手办团. in South Korea in September. The game became an instant hit, and we plan to replicate this success with more games overseas by leveraging our deep understanding of ACG lovers' tastes, our game selection know-how, and our strong distribution power. We are committed to operating responsibly to promote healthy game behaviors and protect teenagers from gaming addiction. As early as 2019, we launched anti-addition measures for team players and have continued to strengthen control mechanisms. By the end of August, all Bilibili-operated games fully compelled with the latest regulation on restriction minor gameplay time in China. We would also like to note that revenues from players under 18 accounted for less than 1% of game revenues in September of 2021. Turning to our vast business. Our vast business is the perfect illustration of our business-to-consumer B2C model. It represents our users' trust in our brand and the willingness to pay for B2B content and services. In the third quarter, our vast business continues to be our largest earner. reaching RMB 1.9 billion, up 95% year-over-year. Unlike any other live broadcasting platform, Bilibili Live Broadcasting has been uniquely integrated with our content ecosystem from day one. As a natural extension of video content, it amplifies our leading content verticals as well as the influence of our content creators. We continue to enrich our live broadcasting content during the period, providing more tools to facilitate our virtual host growth. We are excited to see the increasing influence of various game-like content from our community, including League of Legends, Honor of Kings, and the Kingston Impact. For example, we saw a record-breaking level of popularity for this year's League of Legends World Championship SE11 on Bilibili. On the final game night, the peak concurrent viewers increased by over 160% compared with S10, and we achieved the highest DAU ever in our operating history. We are also diversifying within more entertainment related offerings, especially for virtual uploader or VR related content. In Q3, We have triple digital year-over-year growth in both number of active VUPS and number of viewers in this category. We will continue to add and expand and strengthen our position as the world's leading virtual live broadcasting community. Thanks to our growing roster of high-quality OGVs and the users' tendency to pay for content, our premium members grow to 18.2 million by the end of the third quarter. an increase of 42% year-over-year. For ACG lovers, our comic and audio drama content continues to attract more paying users, again showing the high willingness of our users to pay for content they want and the vast potential that offers as we add exciting new content. As for our advertising services, Advertising represents our business-to-business B2B model and is also soaring. Despite microeconomic facts, our advertising revenue continues to be robust in the third quarter, reaching total advertising revenues of RMB 1.2 billion, an increase of 110% year-over-year. Our enhanced brand influence and our growing number of quality user functions as the building blocks of sustainable growth. As our integrated marketing campaign covers more industry customers, the creativity and the commercial value of our current creators is gaining wider recognition. More native ad videos went viral in Q3, making Bilibili the most sought-after platform in China for advertisers. We continue to promote our integrated marketing campaign and introduce more ad products to our inventory, helping our content creators monetize their talent. During the third quarter, our top five advertising verticals were mobile games, skincare and cosmetics, e-commerce, digital products, and food and beverage. As we move forward, we will continue to advance our growth strategy, and create value for our stakeholders. At the same time, we are committed to shouldering our social responsibility to make the world a better place, including supporting rural education, disaster relief, reducing our carbon footprint, and furthering green initiatives. Moreover, as a proud Chinese corporate citizen with increasing reach, We dream that one day, using art forms such as games, anime, and POGBs, we will be able to spread Chinese culture across the world. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2021 and outlook for the fourth quarter. Total net revenues for the third quarter will be 5.2 billion. up 61% from the same period of 2020. We continue to see a more balanced revenue mix driven by our diversified commercialization channels. Our total net revenue breakdown by revenue stream was approximately 27% mobile games, 37% VAT, 23% advertising, and 13% e-commerce and other business. Cost of revenues increased by 70% year-over-year to RMB 4.2 billion. Revenue sharing costs, a key component of cost of revenues, were RMB 2.2 billion, representing 83% increase from the same period in 2020. Gross profit increased by 34% year-over-year to RMB 1 billion, and our gross margin was 19.6% in the third quarter. Total operating expenses was RMB 2.9 billion, up 57% from the same period in 2020. Selling and marketing expenses was RMB 1.6 billion, representing a 37% increase year-over-year. The increase was primarily attributable to increase the channel and marketing expenses to promote our app and brand. as well as promotional expenses for mobile games and increase in our headcount in sales and marketing personnel. Q3 is our peak season in brand marketing and user acquisition efforts. We strategically allocated more resources and are pleased with the strong momentum shown in both user base growth as well as the quality of our users in terms of engagement levels. G&A expenses was RMB 474.9 million, representing an 87% increase year-over-year. The increase was primarily due to increased headcount in general and administrative personnel, increased share-based composition expenses, and higher rental expenses. R&D expenses were RMB 788.3 million, representing a 97% increase year-over-year. The increase was primarily due to increased headcount in research and development personnel and increased share-based compensation expenses. Net loss was RMB 2.69 billion for the third quarter of 2021, compared with RMB 1.1 billion in the same period of 2020. Adjusted net loss, which is a non-GAAP measure that excludes share-based compensation expenses, amortization expenses related to intangible assets acquired through business acquisitions, income tax related to intangible assets acquired through business acquisition, and the loss of fair value change in public trade companies was RMB 1.62 billion compared with RMB 0.97 billion in the same period of 2020. Basic and diluted net loss per share was each RMB 6.90. Adjusted basic and diluted net loss per share were each RMB 4.16. As of September 13, 2021, we had cash-to-cash equivalents, time deposit, as well as short-term investment of RMB 24.4 billion, compared with RMB 12.8 billion as of December 31, 2020. Our sufficient cash reserve gives us great confidence in our ability to execute our growth strategy, which we believe will yield considerable return in the long run. With that in mind, we are currently projecting net revenues for the fourth quarter of 2021 to be between RMB 5.7 billion and RMB 5.8 billion. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.